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Tech Mahindra: Margins take a hit - Views on News from Equitymaster

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Tech Mahindra: Margins take a hit
Jan 24, 2009

Performance summary
  • Topline declines by 3% QoQ in 3QFY09 on account of decline in volumes.
  • Operating margins contract by almost 6% QoQ during the quarter on the back of higher traveling expense and adverse currency movement.
  • Bottomline declines by 26% QoQ during the quarter.
  • Adds 294 employees during 3QFY09 thus taking the total strength to 25,430 at the end of December 2008.


Consolidated Financial Snapshot
(Rs m) 2QFY09 3QFY09 Change 9mFY08 9mFY09 Change
Sales 11,648 11,322 -2.8% 27,443 34,134 24.4%
Expenditure 7,713 8,143 5.6% 21,394 24,151 12.9%
Operating profit (EBITDA) 3,935 3,179 -19.2% 6,049 9,983 65.0%
Operating Profit Margin (%) 33.8% 28.1%   22.0% 29.2%  
Other income (320) (397)   665 (456)  
Interest 0 - -100.0% 57 2 -96.5%
Depreciation 267 286 7.0% 567 811 43.0%
Profit before tax 3,348 2,496 -25.4% 6,090 8,714 43.1%
Tax 321 270 -15.9% 583 873 49.7%
Minority interest 1 3 170.0% 6 0 -96.7%
Profit after tax/(loss) 3,028 2,229 -26.4% 5,513 7,841 42.2%
Net profit margin (%) 26.0% 19.7%   19.8% 19.8%  
No of shares (m)       121.4 121.7  
Diluted earnings per shares*         46.1  
* On a trailing 12-months earnings basis

What has driven performance in 3QFY09?
  • Tech Mahindra recorded a 3% QoQ decline in topline during 3QFY09. This was led by a 3% QoQ decline in volumes. As for the segments, the TSP segment recorded a 4% QoQ decline in sales during the quarter. However, the TEM segment registered a healthy 13% QoQ growth, thus bringing some sanity to the overall performance.

    Segment-wise Detail
    Revenues (Rs m) 2QFY09 % Share 3QFY09 % Share Change  
    Telecom service provider (TSP) 10,226 87.8% 9,807 86.6% -4.1% -3.6%
    PBIT margin 41.1%   42.7%      
    Telecom equipment manufacturer (TEM) 552 4.7% 624 5.5% 12.9% 0.7%
    PBIT margin 26.1%   25.7%      
    BPO service 636 5.5% 676 6.0% 6.3% 0.4%
    PBIT margin 56.7%   48.8%      
    Others 234 2.0% 216 1.9% -7.7% -0.1%
    PBIT margin 30.6%   31.9%      
    Total 11,648   11,322   -2.8% 0.0%

  • Tech Mahindra recorded an 8% decline in revenue from the European region which contributes 65% of the company’s revenue. This decline can mainly be attributed to the fact that revenue from the BT Global Services deal is slowing down. Business from the North American region recorded a 10% QoQ growth during the quarter.

  • Tech Mahindra’s operating margins contracted by nearly 6% QoQ during 3QFY09. This was on account of higher travelling expense and volatile currency movement.

  • Tech Mahindra’s bottomline declined by 26% QoQ during 3QFY09. This was on the back of contraction in operating margins and forex losses which the company incurred due to depreciation of pound against the rupee.

What to expect?
At the current price of Rs 210, the stock is trading at a multiple of 3.1 times our estimated FY11 earnings. The management has indicated that they maintain a cautious view with regard to the ongoing global economic slowdown. It has also indicated that revenue from the BT Global Services deal is slowing down. However, the company expects that backlog of long-term deals will add value in these conditions and will provide enhanced visibility to its performance in the future. The company is diversifying its offerings in the telecom space networking and communication front which is expected to drive growth going forward.

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